A few months back in a post on ‘Paperbacks in India’ I had talked about how information products have some interesting challenges when it comes to pricing in the developing world. I believe that in what is called Software as a Service (or SaaS) – basically web-based hosted software like your internet banking software or even Yahoo Mail – there are significant opportunities for Indian technologists.

Information products are products like books, movies, music, pharmaceuticals, software and SaaS. In these products the variable cost of the product is negligible compared to the price of the product (to a greater or lesser extent). On the other hand the company makes substantial investments in developing the ‘content’ of the product which needs to be recovered. Since these investments are fixed costs, pricing becomes non-trivial. Most companies price it based upon some notion of value to the customer.

And therein lies the crux of the issue. Value is a very ephemeral concept. The value you attach to something could be very different from the value I attach to it and am willing to pay for it. In reality, prices for classes of information products tend to cluster and the customers start ‘expecting’ similar products to cost about the same. So any movie in a theater will cost $6 to $12 in the US. The DVD will cost $15 to $20. Pay-per-view will cost $3.99. And so on. Pricing in music, books, software operate similarly. Pharmaceutical pricing is different but it is also unique in that at least in the developed world the insurance company or the government and not the patient is paying for the medicines.

The price ranges are very country specific. Thus the Japanese might pay a little more for music than Americans do, while Indians may not want to pay more than $5 for their music CDs. Leakage, or products moving from where they are cheaper to where they are more expensive, is a constant worry of all companies selling information products around the world. The internet makes leakage very difficult to control. Anything that can be sent down fiber knows no boundaries. Pharmaceuticals can’t but music can, software can and books and movies are going to happen soon.

SaaS is the extreme case here. It is in fact meant to be used on the internet through a web browser. Most SaaS businesses targeted at small businesses encourage people to pay by credit card on their sites. They have to assume that they are operating in a global market. So how do they set pricing?

Most SaaS pricing is optimized to the developed world. In a past post I compared Salesforce.com and SugarCRM. Even though SugarCRM’s hosted version is much cheaper than Salesforce.com it is still $480 per user per year. That is a lot of money for a small business in India or China (or a big business for that matter). So are small businesses in India and China, where broadband is getting cheaper and cheaper every day, doomed to ‘eat cake’ while the American SaaS companies price their products beyond their reach? I think not.

I recently came across an Indian company called vTiger. vTiger has a me-too CRM SaaS that is priced at about $100 per user per year and goes down significantly with volume. vTiger seems to have begun by (legally) lifting the open source code developed by SugarCRM and others and rebranding it. It is not clear from their current web-site how much of the app is now theirs (closed source), theirs (open source) or SugarCRM open source. But that is not relevant to our discussion. If SugarCRM had not been open source but instead was just a mid-priced, closed source competitor to salesforce.com, my argument would have remained the same. SugarCRM, with $480 per user is still catering to the top of the pyramid, if you include small businesses from the developing world in the pyramid. And that is why vTiger has a legitimate business opportunity.

I think the bottom of the global pyramid in SaaS (borrowing heavily from Prof. C. K. Prahlad) is a great opportunity for Indian tech startups. India abounds in technical talent but is stymied because it can’t develop cutting edge software for developed markets. Indian technologists aren’t deeply knowledgeable about business practices there and thus lose out. My contention is – forget developed markets. Go for the bottom of the pyramid. There are thousands of businesses – small and large – in China and India that need the same software that is being served up by today’s SaaS providers in the US. While these companies are trapped in their first world pricing traps, Indian companies can create similar SaaS products and target the South. These products, at first will be similar, but will eventually diverge as the needs and price points take them in a different direction from their US competitors. And that is good. It creates entry barriers for when the SaaS companies from the North wake up and realize the potential in the South.

So my advice to budding Indian software entrepreneurs is – ‘Go South, young man. There is gold in them hills.’

3 Responses to Go South, Young Man

Given that the cost acquisition of a small client is nearly equal to that for a large client, does it make sense for a smallish firm to focus on the SMB market?

If I was a business owner, it would pretty much be a no brainer for me – while the SMB segment is good, large customers are the target market since they pay on time, wont go out of business soon and revenue per person or per hour spent on acquiring a large customer would not be much larger than acquiring an SMB customer.